<PAGE>

                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                             _________________________

                                   FORM 10-Q

     (Mark One)

             (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

               For the Quarterly Period Ended December 31, 2000

                                      or

             ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

       For the transition period from _______________ to _______________

                        Commission File Number 0-30539

                                  TVIA, INC.
            (Exact name of registrant as specified in its charter)


          Delaware                                            77-0549628
          --------                                            ----------
 (State or other jurisdiction of                           (I.R.S. employer
 incorporation or organization)                          identification number)

               4001 Burton Drive, Santa Clara, California 95054
              (Address of Principal Executive Offices) (Zip Code)

      Registrant's telephone number, including area code: (408) 982-8588

                             _________________________

  Indicate by check mark whether the registrant: (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
  1934 during the preceding 12 months (or for such shorter period that the
  registrant was required to file such reports), and (2) has been subject to
  such filing requirements for the past 90 days. Yes__X__ No __

  On January 31, 2001, 21,909,262 shares of the Registrant's Common Stock,
  $0.001 par value per share, were outstanding.
<PAGE>

                                  TVIA, INC.

                                   FORM 10-Q

                   QUARTERLY PERIOD ENDED DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                  INDEX                                                                     Page
                                                                                                                            ----
<S>                                                                                                                         <C>
Part I:  Financial Information

Item 1:  Financial Statements

         Condensed Consolidated Balance Sheets at December 31, 2000 and March 31, 2000                                        1

         Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2000 and 1999       2

         Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
         December 31, 2000 and 1999                                                                                           3

         Notes to Condensed Consolidated Financial Statements                                                                 4

Item 2:  Management's Discussion and Analysis of Financial Condition and Results of Operations                                7

Item 3:  Quantitative and Qualitative Disclosures About Market Risk and Interest Rate Risk                                   18

Part II: Other Information

Item 2:  Changes in Securities and Use of Proceeds                                                                           19

Item 5:  Other Information                                                                                                   20

Item 6:  Exhibits and Reports on Form 8-K                                                                                    20

Signature                                                                                                                    21

Exhibit Index                                                                                                                22

</TABLE>

                                       i
<PAGE>

                         PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                                  TVIA, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,               MARCH 31,
                                                                                        2000                      2000
                                                                                     -----------                --------
                                                                                     (unaudited)
<S>                                                                                  <C>                        <C>
ASSETS
Current assets:
 Cash and cash equivalents                                                            $ 43,229                  $  3,789
 Restricted cash                                                                            --                     3,075
 Short term investments                                                                  8,109                        --
 Accounts receivable, net                                                                2,242                     1,010
 Inventories                                                                             4,449                     1,327
 Other assets and prepaid expenses                                                         871                       965
 Deferred debt costs                                                                        --                       981
                                                                                      --------                  --------
  Total current assets                                                                  58,900                    11,147

Property and equipment, at cost:                                                         2,955                     2,115
  Less accumulated depreciation and amortization                                        (2,239)                   (1,894)
                                                                                      --------                  --------
                                                                                           716                       221
Long term investments                                                                    3,523                        --
Other assets                                                                               590                        --
                                                                                      --------                  --------
   Total assets                                                                       $ 60,206                  $ 11,368
                                                                                      ========                  ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
 Loan payable guaranteed by related party                                             $     --                  $  1,070
 Accounts payable                                                                        1,676                     1,762
 Accrued liabilities and other                                                           2,920                     2,400
                                                                                      --------                  --------
  Total current liabilities                                                              4,596                     5,232

Long-term liabilities:
 Loan payable guaranteed by related party                                                   --                     2,959
 Redeemable convertible preferred stock                                                     --                    16,594
 Warrants to purchase redeemable convertible preferred stock                                --                       849
                                                                                      --------                  --------
  Total long-term liabilities                                                               --                    20,402
Commitments and contingencies (Note F)
Stockholders' equity (deficit):
 Convertible preferred stock                                                                --                         5
 Common stock                                                                               22                         5
 Additional paid-in-capital                                                             90,960                    17,078
 Warrants to purchase common stock                                                       1,099                        --
 Accumulated comprehensive income                                                           37                        --
 Deferred stock compensation                                                            (2,849)                   (4,499)
 Accumulated deficit                                                                   (32,999)                  (26,855)
 Treasury stock                                                                           (660)                       --
                                                                                      --------                  --------
Total stockholders' equity (deficit)                                                    55,610                   (14,266)
                                                                                      --------                  --------
Total liabilities and stockholders' equity (deficit)                                  $ 60,206                  $ 11,368
                                                                                      ========                  ========
</TABLE>

           See Notes to Condensed Consolidated Financial Statements.

                                       1
<PAGE>


                                  TVIA, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                   (in thousands, except per share amounts)

                                  (Unaudited)

<TABLE>
<CAPTION>
=======================================================================================================================
                                                              THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                 DECEMBER 31,                   DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>           <C>              <C>           <C>
                                                               2000          1999             2000         1999
                                                               ----          ----             ----         ----

Total revenues                                               $  3,254      $  2,170         $ 11,118      $  4,112

Cost of revenues                                                1,790         1,148            5,933         2,241
                                                             --------      --------         --------      --------
  Gross profit                                                  1,464         1,022            5,185         1,871

Operating expenses:
  Research and development                                      1,943           960            4,867         2,475
  Sales, general and administrative                             1,767           869            4,013         2,322
  Amortization of deferred stock compensation                     681           423            2,035           819
                                                             --------      --------         --------      --------

Total operating expenses                                        4,391         2,252           10,915         5,616
                                                             --------      --------         --------      --------
  Operating loss                                               (2,927)       (1,230)          (5,730)       (3,745)

Interest expense (income), net:
  Interest expense (income), net                                 (866)           96           (1,256)          223
  Amortization of debt guarantee costs and other                   --           243              327           439
                                                             --------      --------         --------      --------

  Interest expense (income), net                                 (866)          339            ( 929)          662
                                                             --------      --------         --------      --------
  Net loss before extraordinary loss                           (2,061)       (1,569)          (4,801)       (4,407)
  Extraordinary loss, net of income taxes (Note C)                 --            --              672            --
                                                             --------      --------         --------      --------

  Net loss after extraordinary loss                          $ (2,061)     $ (1,569)        $ (5,473)     $ (4,407)
                                                             ========      ========         ========      ========
Dividend related to convertible preferred stock                    --            --              671            --
                                                             --------      --------         --------      --------
  Net loss attributable to common stockholders               $ (2,061)     $ (1,569)        $ (6,144)     $ (4,407)
                                                             ========      ========         ========      ========
Basic and diluted net loss attributable to
  common stockholders before extraordinary loss              $  (0.10)     $  (0.40)        $  (0.36)     $  (1.57)
                                                             ========      ========         ========      ========
Basic and diluted net loss attributable to
  common stockholders after extraordinary loss               $  (0.10)     $  (0.40)        $  (0.48)     $  (1.57)
                                                             ========      ========         ========      ========
Shares used in computing basic and diluted net
  loss attributable to common stockholders before and          21,317         3,940           12,929         2,804
  after extraordinary loss                                   ========      ========         ========      ========


-----------------------------------------------------------------------------------------------------------------------
          See Notes to Condensed Consolidated Financial Statements.
</TABLE>

                                       2
<PAGE>

                                  TVIA, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                       NINE MONTHS ENDED
                                                                                          DECEMBER 31,
                                                                              -----------------------------------
                                                                                          (unaudited)
                                                                                   2000                   1999
                                                                                   ----                   ----
<S>                                                                            <C>                       <C>
Net cash used in operating activities                                           $(6,258)                  $(1,965)
                                                                                -------                   -------

Cash flows from investing activities:
 Purchases of available-for-sale investments                                     (8,109)                       --
 Purchases of property and equipment                                               (840)                     (295)
                                                                                -------                   -------
 Net cash used in investing activities                                           (8,949)                     (295)
                                                                                -------                   -------

Cash flows from financing activities:
 Loan proceeds                                                                      159                     3,783
 Loan payments                                                                   (4,188)                   (1,546)
 Proceeds from issuance of common stock                                          56,261                        --
 Issuance of preferred stock to investors                                            --                     3,142
 Restricted funds from stock subscription for
   convertible preferred stock                                                    3,075                        --
 Acquisition of treasury stock                                                     (660)                       --
                                                                                -------                   -------

 Net cash provided by financing activities                                       54,647                     5,379
                                                                                -------                   -------

Increase in cash and cash equivalents                                            39,440                     3,119

Cash and cash equivalents at beginning of period                                  3,789                        --
                                                                                -------                   -------

Cash and cash equivalents at end of period                                      $43,229                   $ 3,119
                                                                                =======                   =======
</TABLE>

           See Notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>

                                  TVIA, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended
December 31, 2000, are not necessarily indicative of the results that may be
expected for the year ended March 31, 2001.

Cash and Cash Equivalents and Short-Term Investments

     The Company considers all highly liquid investment securities with original
maturities of three months or less from the date of purchase to be cash and cash
equivalents. Management determines the appropriate classification of short-term
investments at the time of purchase and evaluates such designations as of each
balance sheet date. To date, all short-term investments have been classified as
available-for-sale and are carried at fair value with unrealized gains and
losses, if any, included as a component of accumulated comprehensive income in
stockholders' equity, net of any related tax effects. Interest, dividends and
realized gains and losses are included in interest income in the statement of
operations. Realized gains and losses are recognized based on the specific
identification method.

Revenue Recognition

     Revenue consists primarily of sales of products to original equipment
manufacturers ("OEMs") and distributors. Revenues from sales to OEMs are
recognized upon shipment. The Company has agreements with certain distributors
which do not contain rights of return and price protection rights. However, a
limited number of distributor agreements do contain rights to return slow moving
inventory or discontinued products held in inventory by the distributor which
has not sold through to an end user. The Company defers revenue recognition
relating to sales to all distributors until such products are sold through to
the end customer by the distributor, or if sell through information is not
available from the distributor, when cash is received from the distributor.
Receipts of cash from those distributors which do not provide sell through
information have historically been indicative of sell through to an end user by
that distributor. Management are not aware of any circumstances that would
require the return of cash to a distributor, once payment from a distributor has
been received.

     The Company also generates revenues from custom software service contracts.
Revenues from custom software contract services are recognized as contract
milestones are achieved which approximates the percentage of completion of the
contract. Costs incurred on custom software service contracts, which are
primarily payroll costs, are recorded as cost of sales. At December 31, 2000,
management's estimates of future contract revenues and contractual costs did not
indicate a loss; therefore no provision for losses on these contracts was
required as of December 31, 2000. If the Company invoices the customer in
advance of services performed under the custom software services contract, the
invoiced amount is recorded as deferred revenue.

     The Company also sells software development kits and application modules to
OEMs. The Company recognizes sales of software development kits and application
modules in accordance with the American Institute of Certified Public
Accountants Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-
2"), as amended. Under SOP 97-2, software revenues are recognized when an
agreement has been executed or a definite purchase order has been received and
the product has been delivered, no significant obligations with regard to
implementation remain, the fee is fixed and determinable and collection is
probable. For the nine months ended December 31, 2000, revenues from the sale of
software development kits and application modules were less than 10% of net
revenues.

                                       4
<PAGE>

Comprehensive Loss

          Comprehensive loss includes other unrealized investment gains that
have been previously excluded from net loss and reflected instead as a component
of accumulated comprehensive loss in stockholder's equity. A summary of
comprehensive income is as follows (in thousands):

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                            DECEMBER 31,                         DECEMBER 31,
                                                            ------------                         ------------
                                                        2000              1999                2000            1999
                                                        ----              ----                ----            ----
<S>                                                <C>                   <C>             <C>                 <C>
Net loss                                               $(2,061)          $(1,569)            $(6,144)        $(4,407)
Unrealized gain on available-for-sale investments           37                --                  37              --
                                                       -------           -------             -------         -------
Comprehensive loss                                     $(2,024)          $(1,569)            $(6,107)        $(4,407)
                                                       =======           =======             =======         =======
</TABLE>


NOTE B - INVENTORIES

     Inventories are stated at the lower of cost or market value. Cost is
determined using the average cost method. The Company periodically evaluates the
quantities on hand relative to current and historical selling prices and
historical and projected sales volume. Based on these evaluations, provisions
are made in each period to write inventory down to its net realizable value.
Inventories are composed of the following (in thousands):

                                  December 31,                  March 31,
                                      2000                        2000
                                      ----                        ----

Raw material                        $1,912                      $  640
Work-in-process                      1,233                         639
Finished goods                       1,304                          48
                                    ------                      ------
                                    $4,449                      $1,327
                                    ======                      ======

NOTE C - NET LOSS PER SHARE

     Net loss per share has been calculated in accordance with the Financial
Accounting Standards Board Statement No. 128, "Earnings per Share" ("SFAS 128").
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding. Diluted loss per share information is the same as
basic net loss per share since common shares issuable upon conversion of
redeemable convertible preferred stock, convertible preferred stock, stock
options and warrants are antidilutive.

     The following table sets forth the computation of basic and diluted net
loss per share (in thousands except per share amounts):

                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED                 NINE MONTHS ENDED
                                                                DECEMBER 31,                       DECEMBER 31,
                                                                ------------                       ------------
                                                             2000            1999               2000            1999
                                                             ----            ----               ----            ----
<S>                                                     <C>                 <C>            <C>                 <C>
Historical:
Net loss attributable to common stockholders after          $(2,061)        $(1,569)           $(6,144)        $(4,407)
           extraordinary loss

Basic:
 Weighted average shares of common stock outstanding         21,891           3,940             13,801           2,804
 Weighted average shares of common stock subject to            (574)             --               (872)             --
          repurchase                                        -------         -------            -------         -------

Weighted average shares used in computing basic net
          loss per share                                     21,317           3,940             12,929           2,804
                                                            =======         =======            =======         =======

Basic and diluted net loss per share attributable to        $ (0.10)        $ (0.40)           $ (0.48)        $ (1.57)
          common stockholders after extraordinary loss      =======         =======            =======         =======
</TABLE>

NOTE D - INCOME TAXES


     The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recorded or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

     As a result of the Company's continued losses, there was no provision for
income taxes for the three or nine months ended December 31, 2000 and 1999.

NOTE E - SIGNIFICANT CUSTOMERS

     Revenues to significant distributors and customers, those representing
approximately 10% or more of total revenues for the respective periods, are
summarized as follows:

<TABLE>
<CAPTION>
                                         For the Three                      For the Nine
                                          Months Ended                      Months Ended
                                          December 31,                      December 31,
                                          ------------                      ------------
                                      2000            1999            2000                1999
                                      ----            ----            ----                ----
<S>                                  <C>              <C>             <C>                 <C>
Customer A.................             26%              *              13%                  *
Customer B.................             20%              *              11%                  *
Customer C.................             17%              *               *                   *
Customer D.................             11%              *               *                   *
Customer E.................              *              10%              *                   *
Customer F.................              *              24%              *                  20%
Customer G.................              *               *              12%                  *
</TABLE>

(* = less than 10%)


                                       6
<PAGE>

     The loss of one or more major distributors or customers could have a
material adverse effect on our business, financial condition and results of
operations.

NOTE F - COMMITMENTS AND CONTINGENCIES

     The Company is subject to various claims which arise in the normal course
of business. In the opinion of management, the Company is unaware of any claims
which would have a material adverse effect on the financial position, liquidity
or results of operations of the Company.

NOTE G - RELATED PARTY TRANSACTIONS

     In August 2000, the Company entered into a five year full-recourse $660,000
note bearing interest at 6.15% with an executive officer of the Company in
connection with the purchase of 60,000 shares of the Company's common stock. The
note was secured by the common stock acquired by the executive officer.

     In December 2000, the Company repurchased this common stock in exchange for
the cancellation of the loan.




ITEM  2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
financial statements and notes thereto set forth in Item 1 of this report. The
statements contained in this report that are not purely historical are forward-
looking statements, including statements regarding our expectations, beliefs,
intentions, or strategies regarding the future. When used in this discussion,
the words "expects", "anticipates", "estimates" and similar expressions are
intended to identify forward-looking statements. These statements relate to
future periods and include statements as to expected operating expenses,
including research and development expenditures, expected sales, general and
administrative expenses, the effect of certain accounting principles, effect of
changes in foreign currency exchange rates, growth in operations, the ability to
commercialize new technologies, and the performance and utility of products and
services. Forward-looking statements are subject to risks and uncertainties
including, but not limited to, risks relating to the development of new products
and services and their use by the Company's potential customers, the ability to
attract and retain a sales force, changes in foreign exchange rates, and the
matters discussed in "Factors That May Affect Future Results". All forward-
looking statements included in this report are based upon information available
to us, and speak only as of the date hereof. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.

Overview

     We design, develop and market semiconductors for the Internet appliance,
broadband set-top box and digital television markets. Our semiconductor
solutions process rich media content streams available from the Internet and
from television and enable consumers to have a customized and interactive
television viewing experience.

     We currently have three product families: the CyberPro 2010 family,
introduced in calendar year 1997; the CyberPro 5000 family, introduced in
calendar year 1998; and the CyberPro 5300 family, introduced in calendar year
1999. These product families currently generate most of our revenues. We sell
our products through three channels. First, we sell our products directly to
original equipment manufacturers, or OEMs, and recognize revenues at the time of
shipment to these OEMs. Second, we sell our products through sales
representatives who receive a commission. Finally, we sell our products to a
number of distributors who have contractual rights to earn a negotiated margin
on the sale of our products. We defer recognition of revenues for sales to our
distributors until

                                       7
<PAGE>

after they have sold our products to end users. We also generate revenues from
development contracts and licensing software which we believe will continue to
constitute a small percentage of total revenues in the future.

     Approximately 71%, 77%, 79% and 75% of our total revenues for the three and
nine months ended December 31, 2000 and 1999, respectively, were derived from
customers located outside the United States. All of our revenues to date have
been denominated in United States dollars. Historically, a relatively small
number of customers and distributors have accounted for a significant portion of
our product sales. Since June 30, 2000, the percentage of our revenues
attributable to sales to distributors has increased substantially. Much of this
increase reflects revenues from design wins with new OEMs, which rely on third
party manufacturers or distributors to provide inventory management and
purchasing functions.

     Various factors have affected and may continue to affect our gross margin.
These factors include, but are not limited to, our product mix, the position of
our products in their respective life cycles, yields and the mix of
our product sales and development contracts and other revenues. For example,
newly introduced products generally have higher average selling prices and
generate higher gross margins. Both average selling prices and the related gross
margins typically decline over product life cycles due to competitive pressures
and volume price agreements. Our gross margin and operating results in the
future may continue to fluctuate as a result of these and other factors.

     The sales cycle for the test and evaluation of our products can range from
three months to nine months or more, with an additional three to nine months or
more before an OEM customer commences volume production of equipment
incorporating our products, if ever. Due to these lengthy sales cycles, we may
experience a delay between incurring operating expenses and inventory costs and
the generation of revenues from design wins.

     We have sustained losses on a quarterly and annual basis since inception.
As of December 31, 2000, we had an accumulated deficit of approximately $33.0
million. These losses resulted from significant costs incurred in the planning
and development of our technology and services and from significant marketing
costs. We expect to experience significant increases in our operating expenses,
particularly in research and development, as we design and market new
technologies.

     We anticipate lower revenues for at least the next two quarters as compared
to the same period in the prior fiscal year. We believe that this is due to a
slowdown in the interactive television industry caused by a slower than
anticipated emergence of the interactive television market, a general industry
inventory correction, delay in customer product introductions in order to
incorporate additional third party features and general economic uncertainty.
Due to anticipated lower revenues and continued increased spending on research
and development, we anticipate that we will continue to incur net losses at
least at the level incurred in the quarter ended December 31, 2000 for at least
the next five quarters. As a result of anticipated net losses and purchases of
fixed assets, we presently anticipate that we will utilize at least one third of
our available cash and equivalents and short-term investments by March 31, 2002.

     In connection with the grant of stock options to employees, the Board of
Directors and certain consultants, we have recorded stock based compensation
related to stock options granted below deemed fair market value through December
31, 2000 of approximately $6.4 million. Of this amount, we amortized
approximately $3.6 million through December 31, 2000. This amount represents the
difference between the exercise price of these stock option grants and the
deemed fair value of the common stock at the time of grant. The remaining $2.8
million will be amortized over the remaining vesting period of the options,
generally four years or less. As a result, the amortization of stock based
compensation will impact our reported results of operations through fiscal year
2005.

     We have a subsidiary in the People's Republic of China which performs
research and development, and a branch office in Taiwan which is primarily
engaged in sales efforts.

Results of Operations

     The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue:


                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                       Three months        Three months        Nine months         Nine months
                                                           ended              ended                ended              ended
                                                        December 31,        December 31,        December 31,       December 31,
                                                            2000                1999                2000               1999
                                                            ----                ----                ----               ----
<S>                                                     <C>                 <C>                 <C>                <C>
Revenues                                                   100.0%              100.0%              100.0%              100.0%
Cost of revenues                                            55.0                52.9                53.4                54.5
                                                          ------              ------              ------             -------
Gross profit                                                45.0                47.1                46.6                45.5
Operating expenses:
Research and development                                    59.7                44.2                43.8                60.2
Sales, general and administrative                           54.3                40.1                36.1                56.5
Amortization of deferred stock compensation                 20.9                19.5                18.3                19.9
                                                          ------              ------              ------             -------
Total operating expenses                                   134.9               103.8                98.2               136.6
                                                          ------              ------              ------             -------
Operating loss                                             (89.9)              (56.7)              (51.6)              (91.1)
Interest expense (income), net                             (26.6)                4.4               (11.3)                5.4
Amortization of debt guarantee costs and other                --                11.2                 2.9                10.7
                                                          ------              ------              ------             -------
Interest expense (income), net                             (26.6)               15.6                (8.4)               16.1
                                                          ------              ------              ------             -------
Net loss before extraordinary item                         (63.3)              (72.3)              (43.2)             (107.2)
                                                          ------              ------              ------             -------
Extraordinary item                                            --                  --                (6.0)                 --
                                                          ------              ------              ------             -------
Net loss after extraordinary item                          (63.3)%             (72.3)%             (49.2)%            (107.2)%
                                                          ======              ======              ======             =======
</TABLE>

     Revenues. Revenues increased to $3.3 million and $11.1 million in the three
and nine months ended December 31, 2000 from $2.2 million and $4.1 million in
the same periods ended December 31, 1999, respectively. The increase was
primarily due to increased shipments of our CyberPro 5000 series of
semiconductors for the Internet appliance, broadband set-top box and digital
television markets. Revenues from four customers, Kanematsu Semiconductor,
General Instrument, AllWell Technology, and Flextronics International accounted
for 26%, 20%, 17%, and 11%, respectively, of total revenues for the three months
ended December 31, 2000.

     Gross margin. Gross margin remained relatively flat at 45.0% and 46.6% in
the three and nine months ended December 31, 2000 compared to 47.1% and 45.5% in
the same periods ended December 31, 1999, respectively. Many factors affect
our profit margin, including, but not limited to, our product mix, the
position of our products in their respective life cycles, yields and
the mix of our product sales and development contracts and other revenues.

     Research and development. Research and development expenses include
personnel and other costs associated with the development of product designs,
process technology, software and programming hardware. Our research and
development expenses reflect our continuing efforts to develop and bring to
market innovative and cost effective semiconductors that process the rich media
content available on the Internet and the broadband network. Research and
development expenses increased to $1.9 million and $4.9 million in the three and
nine months ended December 31, 2000 from $960,000 and $2.5 million in the three
and nine months ended December 31, 1999, respectively. The increase was
primarily due to an increase in research and development personnel as compared
to the same period in fiscal 2000, and to higher levels of depreciation
resulting from the acquisition of computers and lab equipment. Research and
development expenses as a percentage of total revenues were 59.7% and 43.8% in
the first three and nine months of fiscal 2001, respectively, compared to 44.2%
and 60.2% in the same periods of fiscal 2000. The decrease in research and
development expenses as a percentage of revenues in the first nine months of
fiscal 2001 compared to the same period in fiscal 2000 is primarily
attributable to the increase in revenues between periods. We believe that
continued investment in research and development is critical to attaining our
strategic objectives and, as a result, we expect that spending on research and
development will continue to increase in absolute dollars for the foreseeable
future.

     Our research and development activities in the People's Republic of China
provide software and application specified integrated circuit development
support to our domestic operations. We employed 173 people in the People's
Republic of China as of December 31, 2000.

     Sales, general and administrative. Sales, general and administrative
expenses consist primarily of personnel and other costs associated with the
management of our business and with the sale and marketing of our products.
Sales, general and administrative expenses increased to $1.8 million and $4.0
million in the three and nine months ended December 31, 2000, respectively, from
$869,000 and $2.3 million in the three and nine months ended

                                       9
<PAGE>

December 31, 1999, respectively. The increase is primarily due to increased
headcount, including hiring executive officers, associated with the expansion of
our domestic and international sales force, the building of our general and
administrative infrastructure, and the Company's participation at trade shows .
Sales, general and administrative expenses as a percentage of total revenues was
54.3% and 36.1% in the first three and nine months of fiscal year 2001 compared
to 40.1% and 56.5% in the same periods of fiscal year 2000. The decrease in
sales, general and administrative expenses as a percentage of revenues in the
first nine months of fiscal 2001 compared to the same period in fiscal 2000 is
primarily attributable to the increase in revenues between periods. We believe
that our sales, general and administrative expenses will increase in absolute
dollars in future periods as we intend to continue to increase headcount in our
sales organization and to develop product marketing and branding campaigns.

     Amortization of deferred stock compensation. We grant stock options to
hire, motivate and retain employees. We incurred stock compensation expense of
$681,000 and $2.0 million in the three and nine months ended December 31, 2000,
compared to $423,000 and $819,000 in the same periods ended December 31, 1999,
as a result of many key employee hirings.

     Interest expense (income), net. Interest expense (income), net consists
primarily of interest expense (income), net and amortization of guarantee debt
costs. Interest income, net was $866,000 and $1.3 million for the three and nine
months ended December 31, 2000, compared to interest expense, net of $96,000 and
$223,000 for the three and nine months ended December 31, 1999, respectively.
Interest income, net, generated in the three and nine months ended December 31,
2000 was primarily a result of interest earned from our investments which
increased significantly in fiscal 2001 as a result of our initial public
offering, and to a lesser extent, the repayment of our outstanding debt.
Interest expense in the first three and nine months ended December 31, 1999
consist mostly of the amortization of deferred compensation related to warrants
and options issued to guarantors of our debt, and interest expense on this debt.

     Extraordinary loss. In August 2000, we used a portion of the proceeds of
our initial public offering to repay approximately $4 million of debt that was
outstanding at that time. Consequently, as a result of the early extinguishment
of debt, the unamortized portion of the debt guarantee costs, which totaled
$672,000, was recorded as extraordinary loss, net of income taxes, in the nine
months ended December 31, 2000.

     Provision for income taxes. We are taxed in our jurisdictions of operations
based on the extent of taxable income generated in each jurisdiction. For income
tax purposes, revenues are attributed to the taxable jurisdiction where the
sales transactions generating the revenues were initiated. We incurred operating
losses in the three and nine months ended December 31, 2000 and for the fiscal
year ended March 31, 2000, and therefore made no provision for income tax in
these periods.

     Preferred stock dividend. During the nine months ended December 31, 2000,
we recorded a preferred stock dividend of $671,000 representing the value of the
beneficial conversion feature on the issuance of convertible preferred stock in
April 2000. The beneficial conversion was calculated based on the difference
between the conversion price of $7.50 per share and the estimated fair value of
the common stock at that date.

Liquidity and Capital Resources

     During the nine months ended December 31, 2000, we used $6.3 million of
cash and cash equivalents in our operating activities as compared to $2.0
million during the nine months ended December 31, 1999. This increase was mainly
due to a significant increase in receivables and inventory during the nine
months ended December 31, 2000 as compared to the nine months ended December 31,
1999.

     Capital equipment purchases in the nine months ended December 31, 2000
totaled $840,000, compared to $295,000 in the nine months ended December 31,
1999.

     Net cash flow from financing activities of $54.6 million resulted primarily
from the proceeds from the issuance of common stock in our initial public
offering completed in August 2000, the sale of 409,992 shares of Series I
convertible preferred stock, and the sale of common stock to Wind River,
partially offset by the repayment of outstanding debt and the acquisition of
treasury stock.

                                       10
<PAGE>

     At December 31, 2000, our principal source of liquidity consisted of cash
and cash equivalents and short-term investments totaling $51.3 million. Working
capital at December 31, 2000 was $50.8 million.

     We believe that our current cash and cash equivalents balances will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next twelve months. We may also utilize cash to acquire or invest
in complementary businesses or to obtain the use of complementary technologies.

Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133"), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for all fiscal
quarters for fiscal years beginning after June 15, 2000, and did not have a
significant impact on our operating results or financial condition when adopted.

     In March 2000, the FASB issued FASB Interpretation No. 44 (FIN44),
"Accounting for Certain Transactions involving Stock Compensation - an
interpretation of APB Opinion No.25" (FIN 44). FIN 44 is effective July 1, 2000.
The interpretation clarifies the application of APB Opinion No. 25 for certain
issues, specifically, (a) the definition of an employee, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) fixed stock
option or award, and (d) the accounting for an exchange or stock compensation
awards in a business combination. We do not believe that the adoption of FIN 44
had a material impact on our financial position or results of operations.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin SAB 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 includes requirements for when shipments may be recorded as
revenue when the terms of the sale include customer acceptance provisions or
generally requires that revenue recognition occur at completion of installation
and/or upon customer acceptance. We believe that our current revenue recognition
practices comply with SAB 101.

Factors that May Affect Future Results

We expect continuing losses and may not achieve profitability which could affect
our ability to expand our business.

     We have incurred significant operating losses in each year since our
inception and expect to continue to incur net losses for the foreseeable future,
primarily as a result of increases in expenses for research and development. Our
losses increased as we transitioned our focus away from the personal computer
market toward the Internet appliance, broadband set-top box and digital
television markets in 1996. We have incurred net losses of approximately $33.0
million from our inception in March 1993 through December 31, 2000. If we
continue to incur net losses, we may not be able to expand our business as
quickly as we would like. We do not know when or if we will become profitable
and if we do become profitable, we may not be able to sustain or increase our
profitability.

Our operating expenses will increase as we build our business and these
increased expenses may impact our ability to become profitable.

     We have made substantial expenditures on research and development and
organizational infrastructure consisting of an executive team, finance and
management information systems departments and our design center located in the
People's Republic of China. For the fiscal years ended March 31, 1998, 1999,
2000 and for the three and nine months ended December 31, 2000, research and
development expenses represented 92.5%, 220.6%, 48.0%, 59.7% and 43.8% of our
revenues, respectively. We expect to continue to spend substantial financial and
other resources on developing and introducing new products and services, and on
expanding our research and development, our operating infrastructure and our
sales and marketing. We expect that our operating expenses will continue to
increase in absolute dollars and may increase as a percentage of revenues. If
our revenues do not increase, our business and results of operations could
suffer. We base our expense levels in part on our expectations

                                       11
<PAGE>

regarding future revenues. If our revenues for a particular quarter are lower
than we expect, we may be unable to proportionately reduce our operating
expenses for that quarter.

Because the emergence of the interactive television market has been slower than
anticipated, we may not be able to sell our products or sustain our business.

     Our semiconductor solutions are incorporated into products that allow
interactive television. The concept of interactive television and the market for
products that facilitate it are new and developing. As a result, our profit
potential is unproven and may never materialize. Broad acceptance of Internet
appliances, broadband set-top boxes and digital televisions will depend on the
extent to which consumers use devices other than personal computers to access
the Internet. Our success will also depend on the ability of original equipment
manufacturers, or OEMs, and service providers that work with our OEMs to create
demand for and market the products incorporating our semiconductors. Unless a
sufficiently large market for Internet appliances, broadband set-top boxes,
digital televisions and other products that are used for interactive television
develops, demand for products incorporating our semiconductor solutions may not
be sufficient to sustain our business.

Because of our long product development process and sales cycle, we incur
substantial expenses before we generate revenues and may not recover our
expenditures.

     To develop market acceptance of our products, we must dedicate significant
resources to research and development, production and sales and marketing. We
develop products based on forecasts of demand and we incur substantial product
development expenditures prior to generating associated revenues. Our customers
typically perform numerous tests and extensively evaluate our products before
incorporating them into their systems. The time required for testing, evaluating
and designing our products into a customer's equipment can take up to nine
months or more, with an additional three to nine months or more before an OEM
customer commences volume production of equipment incorporating our products, if
ever. Because of this lengthy development cycle, we may experience a delay
between the time we accrue expenses for research and development and sales and
marketing efforts and the time when we generate revenues, if any.

     Furthermore, achieving a design win with a customer does not necessarily
mean that this customer will order large volumes of our products. A design win
is not a binding commitment by a customer to purchase our products. Rather, it
is a decision by a customer to use our products in the design process. In
addition, our customers can choose at any time to discontinue using our products
in that customer's designs or product development efforts. If our products are
chosen to be incorporated into a customer's products, we may still not realize
significant revenues from that customer if that customer's products are not
commercially successful. As a result, our profitability from quarter to quarter
and from year to year may be materially affected by the number and timing of our
new product introductions in any period and the level of acceptance gained by
these products.

If we fail to successfully develop, introduce and sell new products, we may be
unable to effectively compete in the future.

     We operate in a highly competitive, quickly changing environment marked by
new and emerging products and technologies. Our success depends on our ability
to develop, introduce and successfully market new products and enhance our
existing products in the Internet appliance, broadband set-top box and digital
television markets. The development of these new products is highly complex and,
from time to time, we have experienced delays in completing their development
and introduction. Any one of the following factors could affect our ability to
develop, introduce and sell new products and could materially harm our business:

     .    our failure to complete new product designs in a timely manner;

     .    our inability to manufacture our new products according to design
          specifications;

     .    our inability to deliver our products to our customers in a timely
          manner for any reason, including a lack of manufacturing capacity or
          the failure of our contracted foundries to meet targeted manufacturing
          yields; and

                                       12
<PAGE>

     .    our sales force's and independent distributors' inability to create
          adequate demand for our products.

Our future operating results are likely to fluctuate and may fail to meet
expectations which could cause our stock price to decline.

     Our operating results have varied in the past and are likely to do so in
the future as we attempt to meet consumer demand in the emerging markets for
Internet appliances, broadband set-top boxes and digital televisions. Our future
operating results will depend on many factors and may fail to meet our
expectations for a number of reasons. Any failure to meet these expectations or
those of securities analysts and investors could cause our stock price to
fluctuate or decline significantly. A number of factors, including those listed
below, may cause fluctuations in our operating results and stock price:

       .  the general condition in the semiconductor industry market;

       .  fluctuations in the volume of product sales, changes in product mix
          and pricing concessions on sales;

       .  the timing, rescheduling or cancellation of significant customer
          orders;

       .  the timing of investments in, and the results of, research and
          development;

       .  changes in industry standards;

       .  introduction of interactive television services by service providers;

       .  availability of manufacturing capacity and raw materials;

       .  product introductions and price changes by our competitors;

       .  our ability to specify, develop, introduce and market new products
          with smaller geometries, more features and higher levels of design
          integration in accordance with design requirements and design cycles;
          and

       .  the level of orders received that can be shipped in a given period;

       .  changes in earning estimates or investment recommendations by
          analysts; and

       .  changes in investors perceptions.

Our industry is highly competitive, and we cannot assure you that we will be
able to effectively compete.

     The market for Internet appliances, broadband set-top boxes and digital
televisions in particular, and the semiconductor industry in general, are highly
competitive. We compete with a number of domestic and international suppliers of
semiconductors in our targeted markets. We expect competition to intensify as
current competitors expand their product offerings and new competitors enter our
targeted markets. We believe that we must compete on the basis of a variety of
factors, including:

     .    functionality;

     .    performance;

     .    time to market;

     .    price;

     .    conformity to industry standards;

     .    product road maps; and

     .    technical support.

                                       13
<PAGE>

     We currently compete with ATI Technologies, Inc., Broadcom Corporation, and
TeraLogic, Inc. In addition to these competitors, we expect other major
semiconductor manufacturers will enter our targeted markets as the Internet
appliance, broadband set-top box and digital television markets become more
established. A number of companies, including International Business Machines
Corporation, STMicroelectronics N.V., National Semiconductor Corporation and
TeleCruz Technology, Inc., have announced that they are developing or plan to
introduce competing products in the Internet appliance, broadband set-top box
and digital television markets which could result in significant competition.

     Some of our current and potential competitors operate their own fabrication
facilities or have a longer operating history and significantly greater
financial, sales and marketing resources. They may also have preexisting
relationships with our customers or potential customers. As a result, these
competitors may be able to adapt more quickly to new or emerging products,
develop new technologies, or address changes in customer requirements or devote
greater resources to the development and promotion of strategic relationships
among themselves or with existing or potential customers. It is possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share. Increased competition could harm our business, results
of operations and financial condition by, for example, increasing pressure on
our profit margin or causing us to lose sales opportunities.

We depend on two independent foundries to manufacture our products based on our
forecasts, which could result in an oversupply or undersupply of products.

     We do not own or operate our own fabrication facility. We currently depend
upon two outside foundries, Taiwan Semiconductor Manufacturing Corporation, or
TSMC, and United Manufacturing Corporation, or UMC. We do not have long term
supply agreements with these foundries to manufacture our semiconductor
products. Both of these foundries are located in Taiwan and each has limited
manufacturing capacity.

     The foundries require us to provide forecasts of our anticipated
manufacturing orders in advance of receiving purchase orders from our customers.
This may result in product shortages or excess product inventory. Obtaining
additional supply in the face of product shortages may be costly or not
possible, especially in the short term. Our failure to adequately forecast
demand for our products would materially harm our business. The foundries may
allocate capacity to the production of other companies' products while reducing
delivery to us on short notice.

If we have to qualify new independent foundries for any of our products and do
not have sufficient supply of our products on hand, we may lose revenues and
damage our customer relationships.

     Processes used to manufacture our products are complex, customized to our
specifications and can only be performed by a limited number of manufacturing
facilities. The foundries we use have from time to time experienced lower than
anticipated manufacturing yields, particularly in connection with the
introduction of new products and the installation and start up of new process
technologies. In addition, the foundries we use are located in a seismically
active area, and earthquakes have caused these foundries to close for repairs,
resulting in a delay in manufacturing our products.

     Although we primarily utilize two independent foundries, most of our
components are not manufactured at both foundries at any given time. The
inability of one of the foundries to provide components could result in
significant delays and harm our business. In the event either foundry
experienced manufacturing or financial difficulties or suffered any damage or
destruction to its facilities, or in the event of any other disruption of
foundry capacity, we may not be able to qualify alternative manufacturing
sources for existing or new products in a timely manner. For example, in
September 1999, Taiwan experienced a major earthquake. The earthquake and its
resulting aftershocks caused power outages and significant damage to Taiwan's
infrastructure. In addition, as a result of the rapid growth of the
semiconductor industry based in the industrial park where both foundries are
located, severe constraints have been placed on the water and electricity supply
in that region. Any shortages of water or electricity or a natural disaster
could adversely affect these foundries' ability to supply our products, which
could have a material adverse effect on our operating results.

     Even our current outside foundries would need to have manufacturing
processes qualified in the event of a disruption at the other foundry, which we
may not be able to accomplish in a timely manner sufficient to prevent an

                                       14
<PAGE>

interruption in the supply of the affected products. We cannot assure you that
any existing or new foundries would be able to produce integrated circuits with
acceptable manufacturing yields in the future, or will continue to have
sufficient capacity to meet our needs. If our manufacturing requirements are not
satisfied, our business would be materially harmed.

A significant amount of our revenues comes from a few OEMs and any decrease in
revenues from these few customers could significantly impact our financial
results.

     Historically we have been, and we expect to continue to be, dependent on a
relatively small number of OEMs for a significant portion of our total revenues.
Most sales to these customers are through distributors. Sales to one of our
distributors, Weikeng Industrial Co., Ltd. accounted for approximately 16% of
our total revenues for fiscal year 2000, and 12% of our total revenues for the
nine months ended December 31, 2000. For the fiscal year ended March 31, 2000
sales to Allwell Corporation, an OEM, accounted for approximately 12% of our
total revenues. In the three months ended December 31, 2000, Kanematsu
Semiconductor, General Instrument, Allwell Corporation and Flextronics
International accounted for 26%, 20%, 17%, and 11% of total revenues,
respectively. We may not be able to retain our largest customers or to obtain
additional key accounts. Any reduction or delay in sales of our products to one
or more of our key customers or our inability to successfully develop
relationships with additional key customers could have a material adverse effect
on our business.

Customers may cancel or defer significant purchase orders, or our distributors
may return our products, which would cause our inventory levels to increase and
our revenues to decline.

     We sell our products on a purchase order basis through our direct sales
channel, sales representatives and distributors, and our customers may cancel or
defer purchase orders at any time with little or no penalty. We recognize
revenues from sales to our distributors when they have sold our products to
their customers. We recognize revenues on sales to our OEM customers when we
ship our products to the OEM. We generally permit our distributors to return
products to us. If our customers cancel or defer significant purchase orders or
our distributors return our products, our inventories would increase and our
revenues would decrease, which would materially harm our business. Refusal of
OEM customers to accept shipped products or delays or difficulties in collecting
accounts receivable could have an adverse effect on our business.

Our semiconductors are complex to manufacture and may have errors or defects
which could be costly to correct.

     The manufacture of semiconductors is a complex process. Foundries may not
achieve acceptable product yields from time to time due to the complexity of the
integrated circuit design, inadequate manufacturing processes and other reasons.
We refer to the proportion of final acceptable integrated circuits that have
been processed, assembled and tested relative to the gross number of integrated
circuits that could have been produced from the raw materials as our product
yields. Identifying defects and determining the reason for low yields may be
discovered after production has begun and at various stages of the production
cycle. Our failure to discover defects early in the production cycle will
result in higher costs and may require a diversion of our technical personnel
and resources away from product development in order to correct the defect. In
addition, defective products that have been released into the market and
distributed to our customers and end users may result in harm to our reputation,
significant warranty costs, diversion of our technical and managerial resources
and potential product liability claims that would be costly to defend.

Our software is complex and may have bugs or defects which could be costly to
correct.

     Our products depend on complex software that we develop internally and
license from others. Complex software often contains defects, particularly when
first introduced or when new versions are released. Determining whether our
software has defects may occur after our products are released into the market
and distributed to our customers and end users, and may result in harm to our
reputation, significant warranty costs, diversion of our technical resources and
potential product liability claims that would be costly to defend and divert
managerial resources.

                                       15
<PAGE>

We face foreign business, political and economic risks because a majority of our
sales are to customers outside of the United States.

     Sales of our products to our OEM customers and to distributors located
outside the United States accounted for 90%, 81%, 71%, 71% and 77% of our total
revenues in fiscal years 1998, 1999, 2000 and for the three and nine months
ended December 31, 2000, respectively. We anticipate that sales to customers
located outside the United States will continue to represent a significant
portion of our total sales in future periods. In addition, many of our domestic
customers sell their products outside of North America, thereby indirectly
exposing us to risks associated with foreign commerce. Asian economic
instability impacts the sales of products manufactured by our customers, as does
the Chinese New Year, during which time many manufacturers and businesses close
their operations. We could also experience greater difficulties collecting
accounts receivable from customers outside of the United States. Accordingly,
our operations and revenues are subject to a number of risks associated with
foreign commerce.

     To date, we have denominated sales of our products in foreign countries
exclusively in United States dollars. As a result, any increase in the value of
the United States dollar relative to the local currency of a foreign country
will increase the price of our products in that country so that our products
become relatively more expensive to customers in the local currency of that
foreign country. As a result, sales of our products in that foreign country may
decline. To the extent any of these types of risks materialize, our business
would be materially harmed.

The rapid growth of our business and operations has strained and will continue
to strain our administrative, operational and financial resources, and our
failure to manage our future growth could affect our operations and our future
ability to expand.

     We are currently experiencing rapid growth and expansion in our business
and operations. For example, we are expanding our research and development
facilities in the People's Republic of China. Our growth has placed, and will
continue to place, a significant strain on our administrative, operational and
financial resources and increased demands on our systems and controls. To
accommodate our growth, we must implement a variety of new and upgraded
operational and financial systems, procedures and controls, including
improvement of our accounting and other internal management systems, all of
which are likely to require substantial managerial effort. We cannot assure you
that these efforts can be accomplished successfully. Our growth has resulted in
a continuing increase in the level of responsibility for both existing and new
management personnel, and will require that we recruit, hire and train a
substantial number of new personnel. Our failure to manage our growth could
prevent us from successfully achieving market acceptance for our products,
disrupt our operations, delay our expansion and harm our business.

We depend on key personnel, the loss of whom would impair or inhibit the growth
of our business.

     Our success depends on the skills, experience and performance of our
executive officers and other key management and technical personnel, many of
whom would be difficult to replace. We are particularly dependent on Kenny Liu,
our Chairman and Chief Executive Officer, and Jack Guedj, our President. We are
also highly dependent on our founders, Jhi-Chung Kuo and Yee Wong, who run our
engineering and manufacturing operations. We also depend upon our experienced
business development personnel, marketing personnel, systems application
engineers, circuit designers, logic engineers and software engineers. The
competition for employees with these skills is intense, particularly in the San
Francisco Bay Area, and we may not be able to attract and retain a sufficient
number of such qualified new personnel in the future. The loss of the service of
one or more of our key employees, or our failure to attract, retain and motivate
qualified personnel would inhibit the growth of our business.

We may encounter periods of semiconductor oversupply, resulting in pricing
pressure, as well as undersupply, resulting in a risk that we could be unable to
fulfill our customers' requirements.

     The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, its products. These fluctuations
have resulted in circumstances when supply and demand for the industry's
products have been widely out of balance. Our operating results may be
materially harmed by industry wide semiconductor oversupply, which could result
in severe pricing pressure. On the other hand, in a market with undersupply, we
would have to compete with larger companies for limited manufacturing capacity.
If material shortages occur, we may incur additional costs to procure the scarce
components or be unable to have our products manufactured in a timely manner or
in quantities necessary to meet our requirements. Since we outsource all of our
manufacturing, we are particularly vulnerable to supply shortages. As a result,
we may be unable to fill orders and

                                       16
<PAGE>

may lose customers. Any future industry wide oversupply or undersupply of
semiconductors would materially harm our business and have a negative impact on
our earnings.

We rely on strategic relationships to commercialize our products, and these
relationships may require that we expend significant resources without
guarantees that our endeavors will be profitable.

     We rely on strategic relationships with some of our customers who we
believe are the market leaders in our target markets. These relationships often
involve the proposed development by us of new products involving significant
technological challenges. Since the proposed products under development may
offer potential competitive advantages to our customers, considerable pressure
is frequently placed on us to meet development schedules. While an essential
element of our strategy involves establishing such relationships, these projects
require substantial amounts of our limited resources, with no guarantee of
revenues to us, and could materially detract from or delay the completion of
other important development projects. Delays in development could impair the
relationship between us and our customers and negatively impact sales of the
products under development. Moreover, our customers may develop their own
solutions for products currently supplied by us, which could have an adverse
effect on our business.

We depend on third party subcontractors for assembly of our semiconductors which
reduces our control over the delivery, quantity, quality or cost of our
products.

     Substantially all of our products are assembled by one of two
subcontractors, both of which are located in Taiwan. Typically, we procure
services from these subcontractors on a purchase order basis. Their availability
to assemble our products could be adversely affected if either subcontractor
experiences financial difficulties or suffers any damage or destruction to its
facilities or any other disruption of its assembly capacity. Because we rely on
third party subcontractors for assembly of our products, we cannot directly
control product delivery schedules. We have experienced in the past, and may
experience in the future, product shortages or quality assurance problems that
could increase the cost of manufacturing or testing of our products. It is time
consuming and difficult to find and qualify alternative assemblers. If we are
forced to find substitute subcontractors, shipments of our products could be
delayed. Any problems associated with the delivery, quantity or cost of our
products could harm our business.

Political instability in the People's Republic of China or Taiwan could harm our
manufacturing and research and development capabilities and negatively impact
our product sales.

     We operate a facility and are in the process of expanding our research and
development operations in the People's Republic of China. In addition, almost
all of our products are manufactured and assembled outside of the United States
at facilities operated by third parties in Taiwan. The political and economic
conditions in the region, including the People's Republic of China's dispute
with Taiwan, may adversely impact our operations including manufacture and
assembly of our products and research and development efforts. We cannot assure
you that restrictive laws or policies on the part of either the People's
Republic of China or the United States will not constrain our ability to operate
in both countries. If we are required to relocate our facilities, our business
will be disrupted and our costs associated with research and development will
increase.

If our competitors use our intellectual property and proprietary rights, our
ability to compete would be impaired.

     Our success depends in part upon our rights in proprietary technology and
processes that we develop and license from, and to, others. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality agreements with our employees, consultants and strategic
partners in order to protect proprietary technologies that use our products. We
cannot assure you that these measures will provide meaningful protection for our
proprietary technologies and processes, and they do not prevent independent
third party development of competitive products. In addition, it is difficult to
monitor unauthorized use of technology, particularly in foreign countries where
laws may not protect our proprietary rights as fully as in the United States.

     We currently have patent applications pending in the United States, and we
may seek additional patents in the future. Because the content of patent
applications in the United States is not publicly disclosed until the patent is
issued, applications may have been filed which relate to our products or
processes. We cannot assure you that our current patent applications or any
future patent applications will result in a patent being issued with the scope
of the

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<PAGE>

claims we seek, if at all, or whether any patents we have or may receive will be
challenged or invalidated. The failure of any patents to provide protection to
our technology would make it easier for our competitors to offer similar
products.

We may face intellectual property infringement claims that could be costly and
could result in the loss of proprietary rights which are necessary to our
business.

     Other parties may assert patent infringement claims against us, including
claims against technology that we license from others, and our products or
processes may infringe issued patents of others. Litigation is common in the
semiconductor industry and any litigation could result in significant expense to
us. Litigation would also divert the efforts of our technical and management
personnel, whether or not the litigation is determined in our favor. Litigation
could also require us to develop non-infringing technology or enter into royalty
or license agreements. These royalty or license agreements may not be available
on acceptable terms, including limitations on representations and warranties
regarding infringement and indemnification in the event of infringement claims.
Our failure or inability to develop non-infringing technology, license the
proprietary rights on a timely basis or receive appropriate protection on
licensed technology would harm our business.

Regulation of our customers' products may slow the process of introducing new
products and could impair our ability to compete.

     The Federal Communications Commission, or the FCC, has broad jurisdiction
over our target markets. Various international entities or organizations may
also regulate aspects of our business or the business of our customers. Although
our products are not directly subject to regulation by any agency, the
transmission pipes, as well as much of the equipment into which our products are
incorporated, are subject to direct government regulation. For example, before
they can be sold in the United States, Internet appliances, broadband set-top
boxes and digital televisions must be tested and certified by Underwriters
Laboratories and meet FCC regulations. Accordingly, the effects of regulation on
our customers or the industries in which our customers operate may, in turn,
harm our business. FCC regulatory policies affecting the ability of cable
operators or telephone companies to offer certain services and other terms on
which these companies conduct their business may impede sales of our products.
In addition, our business may also be adversely affected by the imposition of
tariffs, duties and other import restrictions on systems of suppliers or by the
imposition of export restrictions on products that we sell internationally.
Changes in current laws or regulations or the imposition of new laws or
regulations in the United States or elsewhere could harm our business.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST
RATE RISK

Quantitative and Qualitative Discussion of Market Interest Rate Risk

     Our cash equivalents and short term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and, in the future, the fair market value of our investments. We manage
the exposure to financial market risk by performing ongoing evaluations of our
investment portfolio and presently invest entirely in short term investment
grade government and corporate securities. These securities will be highly
liquid and generally mature within 12 months from the purchase date. Due to the
short maturities of our investments, the carrying value should approximate the
fair value. In addition, we do not use our investments for trading or other
speculative purposes. We have performed an analysis to assess the potential
effect of reasonably possible near term changes in interest and foreign currency
exchange rates. The effect of any change in foreign currency exchange rates is
not expected to be material to our results of operations, cash flows or
financial condition. Due to the short duration of our investment portfolio, an
immediate 10% change in interest rates would not have a material effect on the
fair market value of our portfolio. Therefore, we would not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a sudden change in market interest rates on our securities portfolio.

Foreign Currency Exchange Risk

     We are an international company, selling our products globally and, in
particular, in Japan, Korea, the People's Republic of China and Taiwan. Although
we transact our business in United States dollars, we cannot

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<PAGE>

assure you that future fluctuations in the value of the United States dollar
will not affect the competitiveness of our products, gross profits realized, and
results of operations. Further, we incur expenses in the People's Republic of
China, Taiwan and other countries that are denominated in currencies other than
United States dollars. We cannot estimate the effect that an immediate 10%
change in foreign currency exchange rates would have on our future operating
results or cash flows as a direct result of changes in exchange rate. However,
we do not believe that we currently have any significant direct foreign currency
exchange rate risk and have not hedged exposures denominated in foreign
currencies or any derivative financial instruments.



                         PART II:    OTHER INFORMATION

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

     (d) Use of Proceeds from Sales of Registered Securities.

     On August 14, 2000, the Company closed the sale of a total of 5,000,000
shares of our common stock, par value $0.001 per share, at a price of $11.00 per
share in a firm commitment underwritten public offering. In connection with the
offering, the Company granted an option to the underwriters to purchase an
additional 750,000 shares for up to 30 days after the offering in connection
with the exercise of the underwriters' over-allotment option. On September 14,
2000, the Company closed the sale of a total of 675,050 shares of our common
stock at a price of $11.00 per share pursuant to the exercise of the
underwriters' over-allotment option. The offering was effected pursuant to a
Registration Statement on Form S-1 (File No. 333-34024), which the Securities
and Exchange Commission declared effective on August 8, 2000. The managing
underwriters in the offering were Banc of America Securities, LLC, Dain Rauscher
Wessels, CIBC World Markets and U.S. Bancorp Piper Jaffray.

     Of the $62,425,550 in aggregate proceeds raised by us in the offering:

        1. approximately $4.4 million was paid to the underwriters in connection
           with the underwriting discount;

        2. approximately $2.8 million was paid by us in connection with offering
           expenses, printing fees, listing fees, filing fees, accounting fees
           and legal fees.

        3. approximately $4.0 million was paid by us to retire notes payable to

        4. the remainder of the proceeds from the offering has been invested in
           investment grade securities.

     We intend to use the net proceeds for general corporate purposes, including
working capital. We may also use a portion of the net proceeds to acquire
additional businesses, products and technologies that we believe will complement
our business. We do not have more specific plans for the net proceeds from the
offering. The amounts and timing of any expenditures will vary depending on the
amount of cash generated by our operations, competitive and technological
developments and the rate of growth, if any, of our business. We will retain
broad discretion in the allocation of the net proceeds from the offering.

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<PAGE>

ITEM 5: OTHER INFORMATION

     To be considered for inclusion in the Company's proxy statement and form of
proxy for its 2001 Annual Meeting of Stockholders, a stockholder proposal must
be received at the principal executive offices of the Company not later than
March 13, 2001.

     A stockholder proposal not included in the Company's proxy statement for
the 2001 Annual Meeting will be ineligible for presentation at the meeting
unless the stockholder gives timely notice of the proposal in writing to the
Secretary of the Company at the principal executive officers of the Company and
otherwise complies with the provisions of the Company's Bylaws. To be timely,
the Company's Bylaws provide that the Company must have received the
stockholder's notice less than 60 days nor more than 90 days prior to the
scheduled date of such meeting. However, if notice or prior public disclosure of
the date of the annual meeting is given or made to stockholders less than 75
days prior to the meeting date, the Company must receive the stockholder's
notice by earlier of (i) the close of business on the 15/th/ day after the
earlier of the day of the Company mailed notices of the annual meeting date or
provided such public disclosure of the meeting date and (ii) two dates prior to
the scheduled date of the annual meeting. For the Company's 2001 Annual Meeting
of Stockholders, which is scheduled to be held on August 21, 2001, stockholders
must submit written notice to the Secretary in accordance with the foregoing
Bylaw provisions no later than June 22, 2001 but not prior to May 23, 2001.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

          See Exhibit Index attached hereto, which is incorporated herein by
          reference

     (b)  Reports on Form 8-K

     The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended December 31, 2000.

SIGNATURE

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<PAGE>

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                        TVIA, INC.


February 14, 2000                       By:       /s/ Michael Hoberg
                                                     ---------------------------
                                                      Michael Hoberg
                                                Vice President of Finance,
                                           Chief Financial Officer and Secretary
                                             (Principal Financial Officer and
                                                 Chief Accounting Officer)

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<PAGE>

                          EXHIBIT INDEX TO TVIA, INC.

                         QUARTERLY REPORT ON FORM 10-Q

                    FOR THE QUARTER ENDED DECEMBER 31, 2000


Exhibit No.    Exhibit Description
----------     -------------------

 3.1*          Amended and Restated Certificate of Incorporation

 3.2*          Amended and Restated Bylaws

 4.1**         Form of Stock Certificate

 4.2***        Warrant to Purchase Stock issued July 27, 2000 to Wind River
               Systems, Inc.

 10.1****      Amended and Restated 2000 Stock Incentive Plan.

 10.2*****     2000 Employee Stock Purchase Plan

 10.4***       Letter Agreement dated July 27, 2000 between Tvia, Inc. and Wind
               River Systems, Inc.


--------------

*     Incorporated by reference from Exhibits 3.3 and 3.4 of Amendment No. 3 of
      Registrant's Registration Statement of Form S-1 (File No. 333-34024) filed
      with the Securities and Exchange Commission on July 14, 2000.

**    Incorporated by reference from Exhibit 4.1 of Amendment No. 2 of
      Registrant's Registration Statement on Form S-1 (File No. 333-34024) filed
      with the Securities and Exchange Commission on July 7, 2000.

***   Incorporated by reference from Exhibits 4.10 and 10.10 of Amendment No. 7
      of Registrant's Registration Statement (File No. 333-34024) filed with the
      Securities and Exchange Commission on July 28, 2000.

****  Incorporated by reference from Exhibits 10.1 and 10.2 of Registrant's
      Quarterly Report on Form 10-Q (File No. 0-3-0359) filed with the
      Securities and Exchange Commission on September 9, 2000.

***** Incorporated by reference from Exhibit 99.1 of Registrant's Registration
      Statement on Form S-8 (File No. 333-48572) filed with the Securities and
      Exchange Commission on October 25, 2000.

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